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26 February 2008

The Law of Diminishing Visitor Returns

Since taking office, the Williams administration has boosted the tourism advertising budget from $6 million to $11 million annually.

Now for most of us, a tourist is someone who doesn't live in a place but who goes there to see the sights. Tourists are good because they bring new money into the local economy and spend it on accommodations, attractions, travel, food and souvenirs.

The current provincial administration is proud of the results their efforts have produced. As Mount Pearl North MHA Steve Kent put it:

In the past four years, non-resident visitors to this province have increased by about 15 per cent, contributing approximately $365 million annually to the provincial coffers. The total resident and non-resident tourism industry contributes about $840 million to the provincial economy each year.

Yes, that's right, non-resident visitors, the people most of us would regard as tourists, actually contributed only 43% of the total economic activity generated by the province's tourism industry.

Hmmmm.

Doubled tourism advertising budget.

Tourists - let's call them non-resident visitors or NRVs - only produced 43% of the "tourism" dollars in the economy.

And that's after we've doubled the provincial tourism advertising budget, which, as Kent crowed, has won all sorts of awards.

Let's take a look at the returns we are getting on our investment. We'll use statistics gleaned from a couple of provincial sources. You may find the results startling.

For the first table, let's look at the number of non-resident visitors (NRV), the advertising budget, the increase in the budget from the previous year and the total amount spent by the visitors, in millions of dollars.

Table 1

A.

Non-resident visitors

(NRV)

B.

Tourism Advertising Budget ($ millions)

C.

Budget increase from previous year

($ millions)

D.

NRV Revenue

($ millions)

2003

424,401

$6.0

-

$300

2004

449,300

$7

1

$330

2005

469,600

$8

1

$336

2006

494,400

$10

2

$365

2007

469,200 (est)

$11

1

not avail

For the second table, let's do some simple math. Let's look at how much each NRV generated in the economy. Let's also look at how much the provincial government spent in order to attract each NRV to the province. The third column looks at the incremental changes, that is how much each new visitor costs to attract.

Table 2

A.

Adv Budget/NRV

B.

NRV$/Adv Budget

C.

Budget increase/NRV increase

D.

$ per non-resident visitor

2003

14.14

49.98

-

$706

2004

15.58

47.14

40.16

$734

2005

17.04

42.05

48.26

$715

2006

20.23

36.46

80.65

$738

2007

23.44

-

-

Observations: As you can see from Table 2, Column A, the provincial tourism advertising spending per visitor has climbed steadily from $14.14 per non-resident visitor to $23.44 in 2007. That's the last year for which we have a fair bit of information.

However, as you can see from Column B in that same table, the return on advertising investment per visitor has actually dropped by over $13.00 per non-resident visitor.

Yes, that's right. We are spending more per visitor to attract them, but the return per visitor is diminishing. [Corrected statement.]

In Column C, you can compare the cost of each new non-resident visitor compared to non-resident visitors overall. Where it took $20 per visitor to attract them in 2006, for example, each "new" visitor that year cost four times as much.

Now, just to be clear, that doesn't mean the same people keep coming back. What we are looking at is the change between the number of visitors the year before and the number attracted in the current year. If there are more in the current year, then the difference is "new".

In Column D you can see the average dollars spent per visitor. You can see a fluctuation year to year. Each visitor spends more on average now than he or she did four years ago, but the spending in 2006 is just 4% above what it was in 2003.

Now there are a few caveats, or warnings here.

First, we don't have the 2007 visitor stats yet. The year is only just over and the provincial officials haven't finished tabulating them all. Note, though, that preliminary estimates have the non-resident visitor numbers down from 2006. If the general trend holds, the dollars they spent will be down accordingly.

Second, the decline in visitors between 2006 and 2007 is not the result of a decreased advertising and marketing effort, at least if we measure by the amount of money spent. There are other factors - like rising costs of travel and the higher Canadian dollar - that likely made Newfoundland and Labrador somewhat less attractive to non-resident visitors than in previous years.

Just be cautious though: the diminishing returns started in the very first year, before the dollar changes cut in.

Third, we don't know exactly how the province defines "non-resident visitors". It's possible that some of what has been captured here actually reflects ex-patriate Newfoundlanders or Labradorians coming back for a short visit.

Overall, though and taking a look at these figures, it's not surprising that the provincial tourism effort appears to be shifting away from non-resident visitors and toward having residents stay home. When the tourism industry talks about increasing activity in the off-seasons of spring and fall, they are clearly seeing the results among locals. That explains why 57% of the total economic activity attributed to "tourists" in the last hear for which we have complete figures actually comes from people whose permanent residence is within the province.

And to think all of this started with a VOCM report back in late December, which in turn inspired a Bond Papers post. Tourism minister Clyde Jackman was encouraging people of the province to spend their tourism dollars at home this year. According to VOCM, Jackman said that in 2007 "local tourists comprised nearly 90 percent of the tourism business.".

With a bit of information, a little analysis and a tip of the hat to the Dominion's finest statistician, we may actually have uncovered a largely ignored story with tremendous implications.